The effectiveness of a cross hedge will be determined by ________.

Question

Quizplus · Accepted Answer

The effectiveness of a cross hedge will depend on the relationship between the cash price of the underlying instrument and its futures price at the time when a hedge is placed and the time when it is lifted. This is because a cross hedge involves hedging with a futures contract that is not directly linked to the underlying asset being hedged. Therefore, changes in the basis (the difference between cash and futures prices) can impact the effectiveness of the hedge. A good cross hedge should have a strong correlation between the cash and futures prices, reducing the impact of basis changes. Option A and C are incorrect because they do not accurately describe the factors that determine cross-hedge effectiveness. Option D is incorrect because the market value of the portfolio is not directly relevant to the effectiveness of the hedge.

The Effectiveness of a Cross Hedge Will Be Determined by ________